The Dutch Tulip Bubble

I went to my Quantitative Business Analysis Professor's after-hours lecture on personal finance today.  It was basically a means to scare us straight into saving for retirement now instead of the BMWs, luxury condos, and Rolexes that most graduates from my business school would spend their first paycheck on.  It was a really great lecture eye-opening: basically the professor painted the picture of people in a race to save the 3 to 5 million dollars that our generation is going to need to retire on despite government taxes of 30 to 40% (including social security, medicare, state tax, etc.) no pensions, and the government debt that is going to trap us sooner or later.

He had one really interesting section on bubbles, including the dot-com bubble, the genetic engineering bubble, the artificial intelligence bubble, and the... Dutch Tulip Bubble.

Apparently in the 1630s, tulips became very popular as a luxury item and a status symbol in the Netherlands.  So much so that people from all levels of societies began to trade tulip bulbs on the open market and create futures contracts to buy bulbs at a set price the next year.  At one point a single tulip bub cost 10 times the annual income of a skilled craftsman in Holland.  Wealthy traders and merchants would buy bulbs and contracts in order to sell them at a profit in the future.

According to British journalist Charles Mackay, who wrote about the bubble two hundred years later:

Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clotheswomen, dabbled in tulips.

There is actually one funny anecdote of a sailor mistaking a tulip bulb for an onion and eating it.  he was jailed because the bulb was worth the salary of a whole ship's crew for a year.

The tulip bubble was not to last forever.  Eventually somebody realized that the whole frenzy was about...flowers.  It took decades for Dutch banks, which had all lent heavily to investors buying tulip futures, to recover.  On a side note, the Dutch still like their tulips today.

Kind of puts our present day financial troubles in perspective, doesn't it?  If anybody is interested, I'm selling 3 and 6 month futures in rainwater.  Email me for prices.